THE DISTILLERY: Aussie battlers

Jotters inspect the damaged fleece of Elders’ rural business, while others explain why Holden has had to put wages in reverse.

This morning, all the talk is about Elders and Holden Australia – two famous Australian names in big trouble. Business scribes believe the former simply didn’t have an offer for its rural services business that it could reasonably take to lenders. In regards to the latter, Holden wants pay cuts to prevent a hastier end to its Australian production.

Firstly, The Australian’s John Durie explains how Ruralco might be the most logical buyer of Elders’ rural services division but it simply doesn’t have the firepower to put forward a compelling offer without a partner or loading up with debt.

“The rural merchandise division is a proud 170-year-old operation and Jackman now will consider holding on and praying for better profits to see if he can maintain the business. That was certainly the message he gave staff when he briefed them late this morning. The division has a book value of around $315 million and Maher didn’t get close. His problem is that with Ruralco’s market value of just $180 million even a one-for-one equity raising wouldn’t scrape up enough cash for the bid.”

Fairfax’s Elizabeth Knight says Elders is to rural services as Billabong is to retail. It’s an iconic brand that bought a bunch of the wrong assets for too much and is now struggling with debt.

“To have accepted the Ruralco offer, the banking syndicate would have had to take a haircut on its $340 million of loans. The value of the equity and the $150 million of hybrid securities would be zero. Brokers have placed values on the Elders rural services business of $320 million to $385 million – which in depressed conditions in the agricultural market look pretty optimistic, and these are certainly not being reflected in the share price, which is perched at 7.1¢. Having decided to spare Elders an undertaker, the banks will now have to come up with a plan B, the company simply cannot be left in its current overgeared structure. One of the reasons will be that to date Elders has managed to pay its interest bills – even in the lean years.”

In a similar vein to Knight, The Australian’s Bryan Frith argues that the Ruralco offer was effectively “pitched” at the banks, via the Elders board.

“Elders is effectively in the hands of its bankers and they are part of any decision making over asset sales, which means that the board’s rejection of the Ruralco offer was made with the approval of the lenders… In the absence of a superior offer, the banks must be hoping at this stage that, together with further asset sales from the forestry run, reversion to the ‘pure play’ rural services strategy will enable Elders to continue trading long enough to reduce its debt to sustainable levels. Whether it can do so remains to be seen.”

Meanwhile, Holden boss Mike Devereux has put the automotive manufacturing union on notice with warnings about General Motors’ potential withdrawal from the Australian market if it can’t get its costs down. Specifically, he wants pay cuts on the production line.

The Herald Sun’s Terry McCrann points out Holden is in the process of launching its new – and quite possibly last – Commodore, which will hopefully form a base from which it can continue manufacturing up until 2022.

“Before yesterday, anybody contemplating buying the new Commodore would have been confident the product was here to stay, at least through 2022 – the current end-date of Holden’s deal with the federal, Victorian and South Australian governments. With all that meant to confidence about parts and servicing to re-sale value. And crucially, to confidence in the build quality of the car. All that potentially got shredded in an instant yesterday. Talk about undermining your own marketing.”

Business Spectator’s Stephen Bartholomeusz has an explanation as to why Devereux chose to do what he did when he did.

“Had Ford not announced last month that it would cease local vehicle manufacturing in 2016, Holden’s request that its workers take a significant pay cut would probably have been greeted with some cynicism. The Ford decision, however, made it very clear how fragile the position of the local car industry is, with its very high costs and a strong dollar making it uncompetitive against a tide of imports swollen further by the artificially depressed yen as Japan pursues its version of quantitative easing, ‘Abenomics’.”

The Australian Financial Review’s Peter Roberts delivers a sensible defence of the car industry for its strategic importance, with 44,000 direct car-making jobs and perhaps three times as many in the surrounding industries.

“The skills and technological implications would be even greater, as there are spill-over benefits to other sectors where it is a source of leading edge management skills. Scratch any mining company or technologically intensive manufacturer and you will find former car makers in leading roles, such as Sam Walsh at Rio Tinto.”

Speaking of Walsh, The Australian Financial Review’s Matthew Stevens looks at the initial efforts of the new Rio boss to make some progress for the miner’s troubled Simandou iron ore project in Guinea. Stevens argues that Simandou, for better or worse, shows a clear difference between the strategies of Rio and rival BHP Billiton. The latter isn’t so much interested in deposits on the distant horizon, specifically outside the OECD.

Fairfax’s Malcolm Maiden suggests that the Australian Securities & Investments Commission’s (ASIC) responsibilities are beyond its limited budget in the wake of the revelations of the Commonwealth Bank of Australia financial planning scandal.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says investors are starting to come to terms with the reality that some companies prefer spin over transparent disclosure during “confession season”.

And finally, in a separate piece, the Herald Sun’s McCrann says the Reserve Bank has been hoping for some time that the Australian dollar would fall with the terms of trade – now, it actually appears to be happening. In the event that the Australian dollar falls further, interest rates will become stimulatory at current levels.

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